Spain

Economic Survey - Spain 2005

The OECD assessment and recommendations on the main economic challenges faced by Spain are available by clicking on each chapter heading below.

Maintaining a strong performance: the challenges ahead

The Spanish economy has performed well in recent years and has weathered the international slowdown in activity better than most OECD countries. As a result, real convergence with the area average has continued and the difference in living standards narrowed to 13% in 2003. Eliminating the remaining gap does, however, pose several challenges: i) Preserving macroeconomic stability and competitiveness. This requires eliminating the persisting inflation differential with the euro area, stabilising the housing market and stemming the sharp rise in household borrowing; ii) Boosting productivity gains which were very weak over the last years; iii) Guaranteeing the financial viability of public finances. Because of the decentralised institutional framework, this involves improving budgetary relations between the different levels of government so as to limit pressures on public spending. It will also be necessary to ensure the viability of government accounts in the face of population ageing.

Preserving macroeconomic stability and competitiveness

The persistence of a sizeable inflation differential with the euro area and a boom in the housing market represent the two most important risks threatening the dynamism of the economy over the medium term. This chapter discusses the structural and fiscal policy options which could ease these tensions. It will focus in particular on improvements to the wage bargaining system, ways to strengthen competition in sheltered sectors and reforms of housing policy.

of special interest: Stabilising the housing market

Raising productivity growth, while maintaining strong job creation

Since the mid 1990s, employment has expanded at a remarkable pace, while the unemployment rate declined from its peak in the early 1990s to about 10.5% at the end of 2004, although this is still one of the highest rates in the OECD. Several interrelated factors have underpinned strong job creation, including very favourable monetary conditions and the arrival of a large number of immigrants, who have mostly taken jobs in a few low productivity sectors. Labour market reforms have also played a role, especially those implemented in 1997 that lowered severance payments and social security contributions for some workers. But labour market institutions, including employment protection legislation, active labour market policies and unemployment benefits, still require comprehensive reforms to push unemployment down further, while fostering a better productivity performance. Reforms of the education system and firm training, and the promotion of business R&D activities through better framework conditions are also essential to improve the productivity record.

In about two decades, Spain was transformed from one of the most centralised countries to one of the most decentralised. Spending functions were devolved rapidly. The regions have exercised their discretionary powers quite extensively and innovative policies have been implemented. But devolution was also accompanied by a hike in public employment and pressures on public spending, reflecting duplication in resources and poor co ordination across and between government levels. The recent devolution of taxing powers could raise the accountability of the regions and, thus, cost-consciousness, although their effective use has been limited. Securing fiscal discipline would require better information on sub-national governments’ policies and outcomes so as to allow citizens to press for improved performance. The financing system of the regions also needs to be reformed to ensure sustainability in the face of changing demographics, while the fiscal rules need to be upgraded to avoid recourse to off-budget operations.

Like the other OECD countries, Spain will be faced with population ageing. The consequences were analysed in detail in the 2001 Economic Survey. It concluded that a reform of the public pension system, including a lowering in the generosity of the parameters underlying pension calculations, was needed to guarantee the long-term financial viability of the system. Since then, demographic prospects have been affected by the surge in immigration. Also various studies have been published, including official ones, suggesting that the scale of the challenge to the public finances may be less critical than had been thought. This chapter takes stock of the situation and assesses the cogency of the OECD’s past recommendations in this area. It also discusses the role that could be played by various measures that aim at increasing the employment rate for women and older workers and by a fiscal policy accumulating surpluses ahead of the demographic shock.

of special interest: The need to reform the public pension system

A printer-friendly Policy Brief (pdf format) may also be downloaded. The Policy Brief contains the OECD assessment and recommendations, but does not include all of the charts available from the above pages.